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| Triad community banks stuffed with foreclosures The balance sheets of Triad-area community banks are becoming increasingly stuffed with assets they don’t particularly want: nearly $84 million worth of properties they had to foreclose on during the ongoing recession. One potentially ominous sign for the regional economy evident in the banks’ numbers for the second quarter is a big jump in commercial properties they’d taken over. After two quarters of declines, banks reported more than double the value of those assets on their books since the end of the first quarter of this year, $14.3 million worth. It’s not clear yet that banks are rushing to unload those holdings or that commercial property values are being forced downward as a result, according to several local lenders and brokers. But as economists warn of a “second shoe” that could drop on the national economy as commercial loans turn sour and flood the market with repossessed property, the Triad likely won’t emerge unscathed. “It’s a very real potential,” said Robin Tyler, president of Alliance Commercial Properties and also a board member of Premier Commercial Bank in Greensboro, of downward pressure on commercial property values, though he said he hasn’t seen it yet. “I do know that everyone looking at properties is well aware of the situation, and very interested in getting a bargain.” Banks end up owning property when efforts to avoid foreclosure fail. Problem loans are identified on regulatory reports going through various stages of late payment and non-accrual before being foreclosed. If no other buyer will pay a minimum price for the property, the bank takes it back and it becomes “Other Real Estate Owned,” or OREO on the bank’s books. At the end of the third quarter of 2008, before the worst of the current recession had set in, ten of the largest community banks in the Triad were sitting on a combined $30.3 million worth of OREO, including $11 million of commercial property. The rest included single and multi-family housing and land and partially completed structures repossessed from failed construction loans. Bad housing and construction loans pushed Triad OREO holdings higher in each subsequent quarter. The fastest pace of growth in total reported OREO came during the second quarter that ended in June, when bank real estate holdings jumped 49.1 percent from $56.3 million to $84 million in three months. Construction and residential properties continue to make up the largest share of OREO holdings, but the most recent quarter saw the value of bank-owned commercial real estate more than double, after having declined in each of the two previous quarters. That’s not all The amount of real estate of all kinds in the Triad that is currently owned by financial institutions is likely much higher than the amount held just by community banks. That’s because market share in the region is dominated by larger regional banks such as Wachovia (now merged with Wells Fargo) and Winston-Salem-based BB&T. Their OREO numbers reflect trends throughout their footprints, though. In the 11 states in BB&T’s territory before its acquisition last week of Alabama-based Colonial Bank, the bank reported $1.22 billion of other real estate owned, up from $978.8 million three months earlier. The rising numbers reflect the worst economy in 50 years, said Harry Davis, a finance professor at Appalachian State University in Boone and the economist for the N.C. Bankers Association. The impact, though, depends on whether banks are pressured to sell that property quickly at big discounts to raise cash, or can be patient and not flood the market. “I don’t think what (North Carolina) banks own will be destabilizing,” Davis said. “It’s not too important who owns it. The issue is, can we find any buyers and establish a bottom for prices for real estate, regardless of where it’s held?” For a bank, the question of what to do with surplus property comes down to the balance between selling in a down market to raise some valuable cash or holding on, absorbing the expense and hassle of maintaining the property, and hoping to be able to sell it for more later. It depends on the property, said Charles Canaday, CEO of Burlington-based MidCarolina Bank. MidCarolina’s OREO value rose from $751,000 at the end of March to $3.3 million by the end of June. Canaday noted that his bank’s ratio of nonperforming assets to total assets, a measure that includes both loans and property, was 1.27 percent, well below the state peer average of 1.97 percent. Canaday said that his bank works with multiple brokers to dispose of unwanted property, but not for far less than the bank thinks it’s worth. Regulators have been known to insist banks write down OREO values to spur sales, but MidCarolina hasn’t faced such pressure, he said. “There are no hard and fast rules that say a bank is required to sell off a piece of property in a certain number of days,” Canaday said. “We’ve been able to sell some properties at what we thought was fair value” though the bank is also comfortable holding on to real estate if that’s likely to mean a better return in the end. But even fair market values are relatively low these days, opening up opportunities for investors to pick up bank-owned properties at good prices. Bob Braswell, CEO of the Greensboro-based Carolina Bank, said his bank has been able to strike deals with some buyers who passed on a property at auction but approached the bank later with a reasonable offer, which can work out well for both sides, he said. Carolina Bank reported owning $3.6 million of other real estate at the end of the second quarter, up from $1.3 million three months earlier. Braswell said areas of the state such as Lake Norman are seeing noticeable downward pressure on property values from bank-owned real estate, but so far in the Triad buyers looking for rock-bottom prices are still having to wait. “The vultures are circling” Braswell said. “We’ve talked to some people who are truly bottom-fishing and not willing to be mindful of the real value of the asset. In those cases your best return is just to ride it out.” feeds.bizjournals.com |
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